Editorial: School bond terms more like payday loans

2013-02-01 16:09:47

The Register reported in November that Anaheim-based Savannah School District issued two capital appreciation bonds last year worth a combined $5.4 million. The district will pay back $8 for every $1 borrowed by the time the bonds reach maturity.

Savannah borrowed under even less-favorable terms in 2009, issuing $239,721 in CABs on which it owes $3.6 million by the final maturity date in May 2034. That works out to a staggering $15 for every $1 borrowed.

While Savannah took on the costliest CABs among Orange County's 28 school districts, according to state figures, it was by no means the only district to engage in such questionable borrowing.

In fact, more than half of O.C. school districts have issued CABs, which delay repayment anywhere from 25 to 40 years, but for which school districts pay what seem to us to be usurious rates.

Against that backdrop, state Assembly members Ben Hueso, D-San Diego, and Joan Buchanan, D-Alamo, recently introduced legislation, Assembly Bill 182, that will impose much-needed limitations on the issuance of CABs, which California Treasurer Bill Lockyer deems so risky, he advises school districts not to use them.

"They are terrible deals," Mr. Lockyer maintains, correctly. "The school boards and staffs that approved these bonds should be voted out of office and fired."

Indeed, conventional bonds typically carry a repayment ratio of 2-to-1 to 3-to-1, which means $2 or $3 in principal and interest for every $1 borrowed. CABs, on the other hand, offer terms that are closer to payday loans than conventional bonds.

That's why Mr. Lockyer recently co-signed a letter with state Superintendent of Instruction Tom Torlakson, urging the state's school districts, as well as boards of education, to "impose a moratorium of issuing CABs" until the Legislature has an opportunity to act upon the measure introduced by Mr. Hueso and Ms. Buchanan.

Such "remedial legislation" is needed, Mr. Lockyer and Mr. Torlakson wrote, "to prevent abuses and ensure that both school board members and the public obtain timely, accurate, complete, and clear information on the costs of CABs, and alternatives, before CABs are issued.

AB182, which is co-authored by state Sens. Marty Block, D-San Diego, and Mark Wyland, R-Carlsbad, would restrict school districts from issuing CABs with maturities of more than 25 years and with repayment ratios of more than 4-to-1.

As it is, CABs allow a school board to borrow now, at exceedingly unfavorable terms, and leave the debt to be handled by boards elected decades down the road.

Ultimately, the costs are borne by a school district's homeowning residents. The district is allowed to tax them each year up to $60 for every $100,000 of their assessed property value.

Districts that issue CABs, on top of conventional bonds, bet that, over time, home values will rise to the point that they will be able to comfortably pay their bond debt. But that is an extremely high risk assumption.

It is too late for the Legislature to do anything about the $9 billion in capital appreciation bonds the state's school districts have issued over the past half-dozen years or so, which Mr. Lockyer rightly describes as "debt for the next generation."

But, by passing AB182, lawmakers can do much to prevent school districts from shifting even more risky bond debt to future generations.